Many people think government assistance is only for the lower income borrower. But there are several ways average Americans can get help buying a home – if they meet the requirements.
If you qualify for a government-backed mortgage because of your military service, your geographic location or your income, you might get surprisingly good terms. In many cases it’s a better deal than taking out a conventional mortgage, which isn’t backed by the federal government.
Let’s look at some of the options.
Federal Housing Administration loans
FHA loans are designed to help first-time homebuyers, including those with higher incomes, and people without significant funds available for a down payment. Borrowers must meet certain criteria, like having enough income to cover payments on their debts as well as presumed daily expenses.
FHA loans provide many benefits, but there is a catch. Borrowers buying single-family homes must pay costly mortgage insurance with FHA loans, although the initial premium can be included in the loan amount. Denise DeCarolis, Operations Manager at VAMortgage.com, a division of 1st Mariner Bank, says there’s an upfront mortgage insurance premium of 1.75% of the base loan amount. An additional .80 to .85% of what you still owe each year is paid in monthly installments for the life of a 30-year loan. For loans of as much as $625,500, FHA’s current ceiling in most areas, annual fees can be as high as 1.05%.
In spite of insurance costs, FHA loans can be a good choice. For one thing, the agency is "a lot more lenient" in terms of borrower requirements than those that must be met to qualify for most conventional loans, according to DeCarolis.
Department of Veterans Affairs loans
Veterans and some spouses and widows can qualify for a VA loan. No down payment is required if the mortgage is below the loan limits for the county. If the seller pays closing costs, DeCarolis says, it’s possible for a veteran to become a homeowner without putting a single dollar into the transaction. In addition, borrowers don’t have to pay mortgage insurance the way they would with an FHA loan.
“If you’re a veteran, this is the best loan,” says DeCarolis. “The VA is truly looking out for the borrower, the veteran.”
U.S. Department of Agriculture loans
USDA loans are designed to help people with lower incomes buy property in rural areas, and DeCarolis says many borrowers are surprised that their geographic location is classified that way. Buyers must meet income requirements, which vary based on location. Like VA loans, USDA loans don’t require a down payment. “It’s really a good deal,” DeCarolis says.
USDA loans require mortgage insurance. The upfront insurance premium is 2% of the loan amount when you buy the house, but the monthly insurance premiums add up to only 0.5% of what’s owed on the loan over the course of a year. That’s less than a third of similar costs for an FHA loan.
For many buyers, government-backed loans let them purchase homes much more quickly than they would be able to if they had to come up with the larger down payments required for most conventional loans. For borrowers who qualify, it’s worth asking a lender if a mortgage backed by the FHA, VA or USDA is your best bet.
Virginia C. McGuire is a Philadelphia-based writer who covers banking and health for NerdWallet.
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